Harnessing the power of behavioral economics
If you’re an entrepreneur, chances are you’ve probably heard of behavioral economics.
It’s what drives customers to make certain decisions based on psychological, cognitive, emotional, cultural and social factors. There are three key themes in behavioral economics:
Heuristics – humans make 95% of their decisions using mental shortcuts or rules of thumb
Framing – the collection of anecdotes and stereotypes that make up the mental filters individuals rely on to understand and respond to events
Market inefficiencies – things like mis-pricing and non-rational decision making
Unlike classical economics, which is based on logic, behavioral economics explores the irrational behavior humans have when it comes to things like decision making. A great example of this at work is Brexit. Richard Thaler, a behavioral economist at the University of Chicago Booth School of Business, says that logically, British citizens should have voted remain based on the stats, but that most people voted “with their guts” to leave. Heuristics, framing and market inefficiencies all played a part in convincing individuals that leaving made sense.
Behavioral economics presents an incredible opportunity for entrepreneurs to influence their customers and help grow their businesses. Few companies actually harness the power of this tool, but by making it a core part of your business, it can have a huge impact on your success. If you want to start applying behavioral economics to your business, here are some easy things you can do.
The first is to consider the way you’re presenting information. The way you frame your products cost can massively effect whether a customer buys your product or not. An example of this in action is the options The Economist offered potential customers purchasing a subscription – one was for an ‘online only’ subscription for $56 and the other an ‘online and print’ subscription for $125. Unsurprisingly, most people chose the first option. To get more people to choose the second, they then introduced a third option – a $125 subscription for print only. No one chose the third option but incredibly, an overwhelming majority now chose the second option! This was because it now looked a lot more attractive.
Tied into this behavior is price bias. As humans, we assume more expensive products to be superior. This point can be seen when members of the Stanford Wine Club were invited to taste five bottles of wine and then rate them to their liking. What they didn’t know, was that there were only three different wines in the bottles – two wines had two bottles each. The tasters were told the price of each wine and can you guess what happened? They rated the more expensive wines higher even though they were the same as the cheaper ones! This was because we inherently expect cheaper things to be inferior – it’s our brains natural response. It’s so hard-wired in us that we genuinely appreciate seemingly expensive things more. These two simple points are something every business-owner should be doing. By making your pricing more attractive, you’re more likely to increase purchases and similarly, if you price your services based on their value (don’t fall into the trap of discount pricing), your customers are much more likely to see your business as respectable.
Another thing you can do is to limit the amount of options for your potential clients. Although choice seems like a great thing, in reality, it’s often overwhelming. Imagine you’re buying a new car. You know what model you want to buy, but when you get to the dealership you’re presented with a million different upgrades: Do you want a parking sensor? Do you want new tyres? Do you want a leather trim? Do you want paintwork protection? Do you want it in a different colour? How does this onslaught of options make you feel? I’m guessing overwhelmed. It’s exactly the same when your business offers too many choices – all it does is lead to more potential customers taking no action. Look at the options you currently give your customers: Are there too many? Is the wording too complicated? Does it look overwhelming? Take all of this into account and try out different ways of framing your products. By doing this, potential customers are much more likely to not only reach a decision but feel more satisfied with their choice.
The final thing you can do to influence your customers is to harness the power of social proof. It’s Friday afternoon, you’re hungry and looking for somewhere to eat. You walk past three restaurants one with people eating inside and two empty – which one are you more likely to walk into? For the majority of people, it’s the one with people inside. Why? Because of something called social proof. Social proof is the idea that we follow the behavior of the masses. So, if people are eating in a certain restaurant, we think it’s because the food is better than the empty ones. By communicating to potential customers the behavior of existing customers e.g. 94% of our clients say our product has transformed their lives, potential customers are more likely to feel confident in buying into you and your service. The more you can show potential clients that their peers are using your service, the more you’ll convince them that’s the route they should also be taking. Case studies and storytelling are great ways to do this and reduce any uncertainty. If you can also get any existing clients to do a review on a trusted site, this will massively help your sales – studies show nearly 70% of online consumers look at a review prior to making a purchase!
Behavioral economics are an easy way for entrepreneurs to strengthen their business. By using the techniques outlined above, everything from retention to profits can be increased – and it’s so easy to do! If your business doesn’t currently use any form of influence on your site or literature, then set aside some time this week to do a full review of your business materials. Not only will this improve your customer experience, but it will also help you eliminate any problem points that could be stopping your business from achieving more.